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HDIL -After The Hammering
HDIL’s share price has halved in CY10 and the stock has
underperformed the BSE Realty Index by 21%. Whilst we remain
concerned about the tightness in funding flows to the sector, this
correction presents a good entry point into HDIL thanks to its: (i)
comfortable net D/E of 0.32x; (ii) zero debt repayment over the next
one year; (iii) strong cash balance; and (iv) robust position in the
transfer of development rights (TDR) market.
The recent ‘bribes for loans’ scam hit Mumbai-based developers particularly
hard with investors raising concerns about debt funding flows to the sector.
Coupled with the Mumbai property prices breaching their 2007-08 highs, this
has led to a slowdown in property sales. Allied to the usual corporate
governance concerns associated with this sector, this cocktail has resulted in a
de-rating of Mumbai’s Real Estate developers. With these concerns now
reflected in the stock price, there is a strong case for re-rating HDIL on the
following counts:
Liquidity position healthy: With QIP proceeds of Rs11.5bn, HDIL has net
debt:equity of 0.32x and zero debt repayments over the next year. Its cash
pile of Rs12bn will be utilized to acquire land for phases II and III of the
Mumbai Airport project. Proceeds of Rs8bn from the recent land sale (at
Rs11,400/sq.ft., end-Dec 2010) at Andheri (a Mumbai suburb), would
create a cash surplus of Rs20bn leading to further balance sheet deleveraging.
TDR market share of 90% provides short term liquidity: HDIL follows
the project completion method of accounting for residential projects while
TDR sales (70-80% of revenue) are recognized upfront. HDIL sold 1mn
sq.ft. of TDR at an average rate of Rs3,000/sq.ft. in 2QFY11. TDR demand
and pricing continues to be robust with HDIL holding the bulk of TDRs
(market share 90%) generated in Mumbai.
Residential launch pipeline strong: HDIL has plans for a 27mn sq.ft.
residential launch over CY11E. The gross unbilled revenue on launched
projects is ~Rs50bn and is expected to be booked in FY12E and FY13E on
a 50-50 basis. FSI sales of 1.1mn sq.ft. in the Goregaon (a Mumbai
suburb) land parcel for Rs6,500mn would accrue from 3QFY11 and this
has an attractive 65% EBITDA margin. The Andheri land sale would reflect
in revenue during 1HCY11E.
Mumbai Airport project: We expect the slum dwellers’ relocation under
phase I covering 25,000 units, (7,000 units are ready while the balance is
expected to be completed by end-CY11) to start by April 2011 (the
previous deadline was early January 2011). Local government agencies
are conducting surveys of slum dwellers to determine their eligibility for relocation.
The pending land payment for phases II and III (covering a total
of 55,000 families) is~Rs7bn and HDIL has already tied up funds for this
acquisition.
Valuation, Recommendation and Outlook
HDIL trades at 0.8x FY11E P/BV a 35% discount to the BSE Realty index P/BV.
On a one-year forward P/BV band, HDIL is trading at 0.75x v/s historical
cross-cycle average of 2.4x. We believe that the market has overpriced the
concerns leading to a sharp stock underperformance. We retain our BUY
stance on the stock with an NAV-based target price of Rs320.
HDIL is a part of the Wadhawan Group. It was
incorporated in 1996 and is a significant real estate
player in the Mumbai Metropolitan Region with the
other cities of operation being Hyderabad, Kochi and
Pune. HDIL has completed more than 100mn sq.ft. of
construction and rehabilitated about 30,000 families
in the last 10 years. HDIL was been awarded the
Mumbai International Airport Slum Rehabilitation
project in October 2007, one of the largest urban
rehabilitation projects in India. The firm has land
reserves of 220mn sq.ft. HDIL follows the ‘Project
Completion Method’ of accounting with TDR (80% of
rev.) and FSI (20% of rev.) revenues recognized
upfront while residential sales are recognized (from
FY12E) as projects are completed.
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